Foreign Bond Investments: Benefits and Risks

The financial tremors of the last decade have left a lasting mark on all aspects of business, and government bonds have felt the tumultuous effects of global recession. Previously lucrative bonds began yielding little to no return. Often this was due to tightening monetary policies and the general fear of market instability.

Still, a closed opportunity on one side can easily become an open opportunity on the other. To boost their national economies, many countries offer government securities with far more favorable return rates. These attractive foreign bonds often come with additional risks. It is essential that you fully understand the nature of government bonds. When you do, you can then apply that knowledge to the circumstances of specific countries.

Reaping the benefits

There are numerous advantages to seeking out quality foreign government bonds, even if we disregard the obvious benefit of greater return rates.

Seeking out a country with government bonds that suit your investment needs can present you with great opportunities that diverge from country to country, but these are a few general benefits you should be looking for.

Benefits to Investing in Foreign Government Bonds

• Higher ROI: Numerous countries offer far greater returns from government bonds than, for instance, the US. A greater return usually means a greater risk of political or economic instability or significant currency fluctuations, but thorough research can yield strong opportunities with minimal risk.
• Portfolio diversification: Investing in government bonds of two or more countries can alleviate the risk of fluctuation and instability, whether political or economic. As we said, government bonds are a fairly safe investment, but it is still smart to keep your eggs in several baskets.
• Diverging policies: Many countries have financial policies that are significantly different from those in your country. This can sometimes present you with market conditions greatly superior to those in your country, and can also be great for your portfolio diversification.
• Currency swings: If a certain national currency is on an upward trend compared to your primary business currency, investing in government bonds in said currency can bring additional profits from the currency shift.
• Added benefits: Many countries offer investment citizenship or investment residency. Governments offer these in exchange for a diverse profile of investments, including government bonds. For instance, an investment of €250.000 or more can get you a second passport in Latvia. A Malta residency requires a combined investment of €290.000 in bonds and real estate. This type of investment rewards you not only with financial returns. Wise foreign investments offer the added benefits of business migration. These can include free travel, access to national health care, tax relief, etc. Take a look at the available golden visa options for business immigration to see what I’m talking about.

Risk management

Government bonds place the government in the role of a debtor, with the investor essentially borrowing money to the government by purchasing its bonds. Most experts consider government bonds a safe investment. A steady income can result in investing in foreign bonds. With that said, they do come with their share of risks.

There are several risk areas that all deserve individual attention:

• Interest rate is the most common risk. It is interconnected with bond prices – when one goes up means that the other goes down. This is particularly visible in volatile markets that often suffer from fluctuations. However, the risk can be alleviated by holding onto the bond until its maturity. You can collect scheduled payments and receiving the bond’s face value once it has been repaid.
• Credit risk denotes government’s ability to meet its debt obligations. There are two main factors to consider here. First, consider the country’s overall economic stability. Second, weigh the degree of corruption and transparency of financial institutions.
• Political instability can be a big risk factor as well. There will always be some form of government in charge and responsible for any debt to investors. But frequent or dramatic regime changes should be a red flag. These can negatively affect government’s ability to meet the demands of investors.
• Currency fluctuations are another risk to consider. Your investment will suffer if bonds are in a currency with a dropping value. While currency fluctuations tend to balance out in the long term, it is still wise to target government bonds of countries with a relatively stable currency.

Final Thoughts

Foreign bonds are commonly considered a risky investment. But data shows that they outperformed the US bond market in the 21st century. That is not to say that these investment options don’t come without risks. Rather, they can be worth a consideration and require a closer look.